U.S. SECURITIES AND EXCHANGE COMMISSION
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission file number 0-13803
GATEWAY INDUSTRIES, INC.
(Exact name of small business issuer as specified in its charter)
Delaware 33-0637631
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
101-01 Foster Avenue
Brooklyn, New York 11236
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: 718-272-9700
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Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act of 1934 during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Transition Small Business Disclosure Format (check one):
Yes [ ] No [X]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable data.
As of May 1, 1996, the Registrant had approximately 1,025,000 shares of
Common Stock
outstanding.
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Gateway Industries, Inc.
Index
Part I--Financial Information
Item 1. Condensed Consolidated Financial Statements (Unaudited):
Condensed Consolidated Balance Sheet--March 31, 1996 . . . 3
Condensed Consolidated Statements of Operations--
Three Months Ended March 31, 1996 and 1995 . . . . . . . 5
Condensed Consolidated Statements of Cash Flows--
Three Months Ended March 31, 1996 and 1995 . . . . . . . . 6
Notes to Condensed Consolidated Financial Statements7
Item 2. Management's Discussion and Analysis or Plan
of Operations . . . . . . . . . . . . . . . . . . . . . . 10
Part II--Other Information
Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . . 12
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Gateway Industries, Inc.
Condensed Consolidated Balance Sheet (Unaudited)
March 31, 1996
Assets
Current assets:
Cash and cash equivalents $574,000
Accounts receivable, less allowance for
doubtful accounts of 2,264,000
$411,000 in 1996
Inventories (Note 2) 3,345,000
Prepaid expenses and other current assets 342,000
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Total current assets 6,525,000
Property, plant and equipment, at cost, less
accumulated depreciation (Note 3) 6,662,000
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Total assets $13,187,000
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Liabilities and shareholders' equity
Current liabilities:
Accounts payable $713,000
Accrued expenses and other liabilities 906,000
Short-term financing (Note 4) 3,413,000
Bonds payable (Note 5) 4,780,000
Current portion of capital lease obligations 175,000
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Total current liabilities 9,987,000
Accounts payable, less current portion 300,000
Capital lease obligations, less current portion 144,000
Other long-term liabilities 70,000
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Total liabilities 10,501,000
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Commitments and contingencies (Notes 4 and 5)
Shareholders' equity:
Preferred stock, $.10 par value, 1,000,000
shares authorized, -
no shares issued and outstanding
Common stock, $.001 par value, 10,000,000 shares
authorized, 1,000
1,035,013 shares issued and outstanding
Capital in excess of par value 3,950,000
Accumulated deficit (1,219,000)
Treasury stock (46,000)
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Total shareholders' equity 2,686,000
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Total liabilities and shareholders' equity $13,187,000
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See accompanying notes.
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Gateway Industries, Inc.
Condensed Consolidated Statements of Operations (Unaudited)
Three months ended March 31
1996 1995
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Net sales $4,431,000 $-
Cost of sales 3,932,000 -
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Gross profit 499,000 -
Sales and marketing 358,000 -
General and administrative expenses 411,000 43,000
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Operating loss (270,000) (43,000)
Other income (expense):
Interest income 7,000 48,000
Interest expense (185,000) -
Other income (expense) (1,000) -
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Total other income (expense)
(179,000) 48,000
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Net income (loss) $(449,000) $5,000
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Net loss per share $(.44) $(.00)
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Weighted average number of shares and
equivalents outstanding 1,025,000 1,035,000
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See accompanying notes.
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Gateway Industries, Inc.
Condensed Consolidated Statements of Cash Flows (Unaudited)
Three months ended
March 31
1996 1995
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Cash flows from operating activities
Net income (loss) $(449,000) $5,000
Adjustments to reconcile net income
(loss) to net cash used in
operating activities:
Depreciation and amortization 86,000 1,000
Changes in operating assets and
liabilities:
Accounts receivable (64,000) -
Inventories (557,000) -
Prepaid expenses and other current
assets (32,000) 47,000
Accounts payable 104,000 (37,000)
Accrued expenses and other liabilities 294,000 (37,000)
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Net cash used in operating activities (618,000) (21,000)
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Cash flows from investing activities
Purchase of property and equipment (34,000) -
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Net cash used in investing activities (34,000) -
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Cash flows from financing activities
Purchase of treasury stock (46,000) -
Repayments of capital lease
obligations (61,000) -
Repayments of short-term financing (4,304,000) -
Proceeds from short-term financing 4,789,000 -
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Net cash provided by financing
activities 378,000 -
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Decrease in cash and cash equivalents (274,000) (21,000)
Cash and cash equivalents at beginning
of year 848,000 3,474,000
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Cash and cash equivalents at end of
year $574,000 $3,453,000
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See accompanying notes.
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1. General
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB and Item 310 of
Regulation S-B. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, the accompanying unaudited
interim consolidated financial statements contain all adjustments (consisting
only of normal recurring accruals) necessary to make such financial statements
not misleading. Results for the three months ended March 31, 1996 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1996. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's Annual Report on Form
10-KSB for the year ended December 31, 1995.
2. Inventories
The major components of inventories at March 31, 1996 are as follows:
Raw materials $1,801,000
Work in process 361,000
Finished goods 1,183,000
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$3,345,000
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3. Property, Plant and Equipment
The major components of property, plant and equipment at March 31, 1996 are as
follows:
Estimated Useful
Lives
in Years
Building $5,196,000 40
Machinery and
equipment 1,493,000 7
Office furniture and
equipment 88,000 7
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6,777,000
Accumulated
depreciation (115,000)
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$6,662,000
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4. Short-Term Financing
Marsel has a line of credit with a domestic lender aggregating $4,000,000 of
which borrowings of $2,938,000 were outstanding as of March 31, 1996. Borrowings
under the line of credit is limited based on specified percentages of eligible
inventories, accounts receivable and certain other assets of Marsel, as defined.
Interest is payable at the prime rate plus 1-1/2%. Interest rates on the
borrowings ranged from 10% to 10.25% in 1996. The line of credit expires in
October 1996.
In addition, Marsel has a term loan with the domestic lender aggregating
$475,000 at March 31, 1996. The term loan is payable in 60 monthly installments
of approximately $8,333 plus interest at the prime rate plus 1-1/2% through
December 1, 2000.
The line of credit and term loan require Marsel, among other conditions, to meet
various financial requirements, including minimum working capital and net worth
as defined. Substantially all of Marsel's assets are pledged as collateral for
the outstanding borrowings. Marsel was not in compliance with certain loan
covenants under the arrangement during 1996. Accordingly, the entire amount due
under the term loan has been classified as current.
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5. Bonds Payable
Marsel has bonds payable which require principal payments of $450,000 per year.
Interest is payable at an average rate of 7.5% per annum through November 1998.
In November 1999, the remaining principal balance of $3,430,000 is due. The
bonds are collateralized by a letter of credit at 1% per year. The bank issuing
the letter of credit requires Marsel, among other conditions, to meet various
financial requirements, including minimum working capital and net worth as
defined. The outstanding principal balance as of March 31, 1996 approximated
$4,780,000. Marsel was not in compliance with certain covenants under the
financing arrangement during 1996. Accordingly, the entire amount due under the
bonds has been classified as current.
6. Pro Forma Information (Unaudited)
On November 24, 1995, the Company acquired certain assets and acquired the
business of Marsel (a manufacturer of mirrors). The operations of Marsel are
included in the consolidated statements of operations from the date of
acquisition. The transaction was accounted for as a purchase.
The pro forma unaudited results of operations for the three months ended March
31, 1995, assuming the purchase of Marsel had been consummated as of January 1,
1995, are as follows (in thousands, except per share data):
1995
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Revenues $5,659
Net income 267
Net income per common share .26
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Item 2 MANAGEMENT'S DISCUSSION AND ANALYSIS
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OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Introduction
The financial statements included in this Report as of, and for the quarter
ended, March 31, 1996 contain the consolidated financial condition and results
of operation for the Company and its wholly-owned subsidiary, Marsel Mirror &
Glass Products, Inc. ("Marsel"). During the comparable fiscal quarter last year,
the Company had no operating business and a comparison of last year's quarter
with this year's quarter is not meaningful. However, where information
concerning Old Marsel's results of operation are ascertainable and deemed to be
meaningful for an understanding of the Company's business and financial
condition, the following discussion will attempt to compare results from period
to period. The financial data with respect to Old Marsel was not prepared by the
Company or Management and it is assumed, without any independent verification,
to accurately reflect Old Marsel's results in accordance with generally accepted
accounting principles.
Results of Operations
Net sales were $4,431,000 for the quarter ended March 31, 1996, which
represents a 22% decrease from Old Marsel's net sales for the comparable quarter
last year. Management believes that the decline resulted primarily because Old
Marsel, prior to its acquisition by the Company on November 24, 1995, was not
included in the annual programs of several of its larger customers due to their
uncertainty regarding Old Marsel's ability to fill such customer's orders in a
timely and complete manner. Adverse weather conditions during the quarter,
combined with an already sluggish retail environment may have also contributed
to the decline in sales. Current members of Marsel's new management have met
with such customers in an attempt to restore their confidence in Marsel.
Historically, Old Marsel's revenues were stronger during the second half of
the year, primarily because retailers tend to expand mirror and framed art
inventories for "Back to School" and holiday demand.
Gross profit margin was 11.3% for the quarter ended March 31, 1996, lower
than Old Marsel's historical norms. Management believes that gross profit margin
for the quarter was negatively impacted by reduced level of sales.
For the quarter, the Company experienced an operating loss of $270,000 and
a net loss (before taxes) but after interest of $449,000. In order for the
Company to become profitable, it must increase revenues significantly. During
the first quarter, Marsel hired a new President, who has over 25 years of
experience in sales and marketing to mass retailers, and also began
restructuring its sales department. There can be no assurance, however, that
such steps will be successful.
Liquidity and Capital Resources
The Company's consolidated net working capital deficit at March 31, 1996
was $3,462,000, which included cash of $574,000 held by the Company and reflects
the classification of $4.78 million, the entire amount due under the IDA Bonds,
as current.
Since December 31, 1995, net working capital declined by $443,000 as a
result of losses sustained by the Company during the quarter. Sources of cash
for Marsel include income for operations, if any, and borrowings under the
Commercial Loan Agreement, as defined below.
Marsel is party to a loan agreement (the "Commercial Loan Agreement") with
a commercial bank (the "Commercial Lender," and collectively with the L/C Bank,
the "Banks") providing for revolving loans of up to $4 million and a term loan
of $500,000. The loans are secured by all Marsel's non-real estate related
assets. The Commercial Loan Agreement provides for revolving loans based upon
50% of Marsel's eligible inventory and 80% of its eligible accounts receivable.
Outstanding amounts under the revolver and term loan bear interest at 1.5% per
annum above the Commercial Lender's prime rate. The Commercial Loan Agreement
terminates on October 31, 1996. As of March 31, 1996, $2,938,000 and $475,000
were outstanding under the revolver and term loan, respectively.
Marsel is also a party to an Amended and Restated Loan and Security
Agreement (the "L/C Loan Agreement") with National Bank of Canada (the "L/C
Bank"), which provides for the L/C Bank to issue a letter of credit securing all
of Marsel's obligations under the IDA Bonds, which as of March 31, 1996 was
$4,780,000 plus accrued interest of
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$120,300. Marsel has agreed to reimburse the L/C Bank for all payments made to
or on behalf of Marsel, including drawings on the L/C. Marsel's reimbursement
obligations are secured by a lien on all its real estate related assets.
The L/C Loan Agreement provides that the L/C Bank must renew the L/C
annually if Marsel (a) meets certain financial covenants and reporting
requirements, (b) has met all L/C reimbursement obligations, (c) either (x)
renewed the Commercial Loan Agreement, or obtained a new loan agreement (in
either case on terms reasonably satisfactory to the L/C Bank) to finance its
working needs for at least one year past the then expiration date of the L/C, or
(y) has deposited cash collateral sufficient to make the next annual payment
under the Bonds with the L/C Bank. If the L/C is not renewed, all amounts due
under the Bonds will become due and payable. In such event, the Company will
require financing. There can be no assurance that such financing could be
obtained, or, if obtained, would be on advantageous terms.
The Loan Agreements contain various covenants relating to Marsel's
performance and financial condition. At March 31, 1996, Marsel was not in
compliance with certain of such covenants. The Company is negotiating with each
of the Banks to waive such non- compliance or to modify the covenants. If such
waivers or modifications are not received, each Bank could declare all
outstanding amounts immediately due and payable. The Company does not have the
financial resources to make such payments and there can be no assurance that it
could obtain financing to do so.
The Company is currently exploring several options to enhance its financial
condition. First, it is seeking to obtain a guaranty of the New York State Urban
Development Corporation (the "UDC") of up to $2 million of Marsel's borrowings
under the Commercial Loan Agreement. If such guaranty is obtained, Marsel will
be able to borrow an additional $300,000 under the Commercial Loan Agreement and
the interest rate on borrowings guaranteed by the UDC would decline by 1.5% per
annum to the Commercial Lender's prime rate. The UDC has advised Marsel's
management that it supports issuing the guaranty but is awaiting passage of New
York State's 1996-1997 budget. There can be no assurance that such guaranty will
be made.
Second, the Company is seeking to obtain a mortgage loan secured by its
real estate interests in an amount sufficient to repay all obligations under the
Bonds. Such loan, if obtained, would provide for a 25-year amortization
schedule, thereby reducing the Company's principal payments by approximately
$360,000 per year. Marsel is in discussions with its primary proposed lender
seeking to obtain a preliminary commitment. If such commitment is obtained the
refinancing will be subject to such lender's due diligence, among other things.
There can be no assurance that Marsel will be able to obtain such financing.
Third, the Company is planning to make a rights offering whereby each
shareholder of the Company would be granted the right, for a specified period of
time, to purchase shares of Common Stock at a purchase price per share
discounted from market value to be determined by the Board. The Company hopes to
raise up to $8,000,000 by such an offering. The Company hopes to consummate such
an offering late in the second fiscal quarter or early in the third fiscal
quarter.
Management believes that if the foregoing financing options are effected,
the Company will have adequate liquidity to fund operations and growth for the
foreseeable future. If such plans are not consummated, and the Banks declare the
Loans to be in default, or fail to renew the Loan Agreements, the Company will
be required to repay its indebtedness to the Banks. The Company does not have
the resources to make such repayments and would require financing to do so.
There can be no assurance that such financing could be obtained, or, if
obtained, would be on advantageous terms.
In addition, if the Company continues to sustain large operating losses, it
may not be able to provide cash to fund its working capital needs or to continue
its operations at current levels.
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PART II
Item 3 DEFAULTS UPON SENIOR SECURITIES
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Marsel does not meet the financial covenants set forth in the
Commercial Loan Agreement and the L/C Loan Agreement. As a
result of these Events of Default, the Commercial Lender may
refuse to make further advances to, or to issue letters of credit
on behalf of, Marel, may accelerate Marsel's payment obligations
and declare all amounts immediately due and payable and may avail
itself of a variety of other remedies.
In addition, the occurrence of the above Events of Default causes
an event of default under the L/C Loan Agreement. During the
continuance of such an Event, the L/C Bank may accelerate all
amounts due from Marsel and foreclose its interest in the
collateral securing all amounts due from Marsel. The L/C Bank
may also notify the trustee under the IDA Bonds that the L/C Bank
will not reinstate the interest component of the letter of credit
and thereby cause an acceleration of the Bonds.
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SIGNATURES
In accordance with the requirements of the Securities Exchange
Act of 1934, the registrant caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Gateway Industries, Inc.
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(Registrant)
Date: May 15, 1996 By:/s/ Warren G. Lichtenstein
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Warren G. Lichtenstein
Chairman of the Board
and Principal Financial
and Accounting Officer
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